Small-Cap ETFs Fading to Start 2017

To end 2016, small-cap stocks were one of the hottest trades, but to start 2017, enthusiasm is waning for smaller stocks and the related exchange traded funds.

For example, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM) are badly lagging large-cap benchmarks.

In fact, IJR has traded slightly lower to start 2017 while IWM is up barely more than half a percent. Some analysts are concerned small-caps could see more near-term downside.

“he lag is due in part to waning enthusiasm around the prospect of such tax cuts being implemented this year, as health-care reform and defense spending have appeared to move to the fore over tax policy, said Erin Gibbs, S&P Global’s equity chief investment officer,” reports CNBC.

Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.